In this series of articles, we explore the implications of SECURE 2.0’s changes to catch-up contributions and how employers should respond.
Employers can offer participants who are age 50 or older the opportunity to make additional catch-up contributions to their retirement plans. Doing so provides a great way for older workers to save more money—up to an extra $7,500 for 2023—as they get closer to retirement age. As a result, studies suggest that as many as 98% of plans offer catch-up contributions.
Historically, those plans could offer all participants the choice to make catch-up contributions on a pre-tax and/or Roth basis. However, the SECURE 2.0 Act changes all that. Beginning after December 31, 2023, SECURE 2.0 indicates that any plan that permits catch-up contributions must require certain employees—i.e., those whose wages from their employer exceed $145,000 in the prior calendar year—to make their catch-up contributions on a Roth basis. This change raises a host of questions about how the rule is intended to apply in practice and even more concerns about the operational obstacles employers will face in attempting to implement the change by year-end. As a result, industry groups have already begun to push for priority guidance, transition relief and delayed effective dates to provide employers sufficient time to work with their recordkeepers and payroll providers to implement this change.
Until that guidance is issued, however, employers continue to raise questions about a myriad of issues, including the following:
Implementation challenges for plans using spillover and separate contribution elections;
Use of a special definition of wages for purposes of applying the $145,000 limit;
Impact of the $145,000 limit on mid-year hires and employees with variable pay;
Ability to require all employees, not just those making more than $145,000, to make catch-up contributions on a Roth basis; and
Inability to prevent employees who exceed the $145,000 limit from making catch-up contributions without eliminating catch-up contributions from the plan entirely.
Despite the many questions that remain, it is important for employers to coordinate with their recordkeepers and payroll providers as soon as possible to ensure that they understand the potential impact of the change, which systems will need to be updated to address it and who will bear that responsibility. Importantly, changes that require payroll and recordkeeping coordination often take many weeks, and even months, to implement and test. Therefore, employers will need to continue planning for these changes while they look forward to future guidance. This will be even more pressing for plans that do not currently offer Roth contributions and will need to add it to their plans to facilitate this change.
For any questions regarding SECURE 2.0 changes, please contact your regular McDermott lawyer or one of the authors.